January 20, 2018

2017 Grain Market Year in Review

By Karl Setzer, Risk Management Team Leader

To say the calendar year 2017 was full of unexpected turns in the markets may be the greatest understatement ever.

The years started out with all eyes on the financial markets to see what would happening following the election and placement of the new administration. Financial markets reacted approvingly, which may have been more of a coincidence than anything, but it still brought fresh investors to the marketplace. This sudden increase in the financial market actually hindered commodity trade as less interest was shown on those contracts. This was apparent all year, as any dip in the financials lent support to commodities.

The first story worth watching of the year was the South American harvest. Production numbers out of South America came in better than expected. This was credited to a near perfect growing season and improved farming practices. Farmers in South America have upped their use of inputs, mainly fertilizer, which has also been a great benefit for production.

The crop that received the most attention in South America was the Brazilian Safrinha crop. This is the winter crop that is grown in Brazil, and in many cases, is where Brazil’s exports come from. Given the record yields this crop produced, the United States was faced with prolonged export competition all year.

Chinese trade developments also were quick to impact the U.S. market last year. This started with China banning imports of distiller grains from the United States over the possibility of unapproved GMO content in them. While this may have been part of the reason China wanted to back away from U.S. DDGs, elevated domestic ethanol production was likely more of a factor. Chinese officials wanted to use their own DDGs rather than make imports, and the decision to ban them from the U.S. was an easy remedy to the situation.

Global trade on a whole was a factor for the market all year, primarily what changes were expected to take place to world trade agreements. The one that received the most attention was NAFTA, the North American Free Trade Agreement. There are thoughts that the United States will withdraw from this agreement and it will severely limit our exports. This is not out of the question, as Mexico and Canada are two of the top three trade partners the United States has.

The greatest surprise for the market in the past year came from the U.S. production season. Spring planting started out cool and wet in many regions of the Corn Belt. In fact, some regions of the Eastern Corn Belt had to reseed their crops two and three times due to excessive rainfall. This immediately generated talk of low yields and loss production.

Once the crops were in the ground, the weather talk only intensified. The focus shifted to the Upper Plains where severe drought was reported. This was focused on the Dakotas where yield loss of up to 50% was predicted.

As the growing season progressed, some analysts started to change their opinion on the crops. Field reports started to indicate that the crops were actually developing nicely, especially in fringe regions. This was verified by crop tours that found better stands than nearly all of trade was expecting. As a result, some analysts started to raise their yield expectations, and generated some disbelief in the market.

This uncertainty increased right up to the start of the harvest season. Initial yield reports came in much better than expected, with several cases of the Deep South reporting record production. The initial reaction to this was “just wait until harvest moves north, those yields will decline.” The reality is that they did not drop off, especially on corn. Many regions of the Corn Belt reported corn yields that were very close to last year’s, if not larger. As harvest wound down it was apparent that trade greatly underestimated the size of this year’s crop, on both corn and soybeans.

One positive side of these high yields is that with the market already being depressed, production numbers did not pressure values. In fact, in some cases, the high yields actually generated more income than what farmers were receiving a year ago on a per acre revenue case.

Questions are now being asked on what 2018 will bring the markets. One thing that will be likely is a slow reaction to adverse weather given this year’s yields. Any changes to trade policies and the financial markets will also be key to how the commodity market acts. At this point, it is not out of the question that 2018 could bring us a market very similar to 2017; sideways and lethargic activity all year.

Karl Setzer is a Commodity Trading Advisor/Market Analyst at MaxYield Cooperative®. His syndicated commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.MaxYieldCooperative.com. The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.

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